After two weeks of back and forth with HP support we isolated the issue to client connection timeout. We increased the timeout value from 120 to 400 using the WebGate customization tool on the client and that fixed the issue.
You can download the Webgate and tool from for example: http://<QC_IIS_URL>/qcbin/Apps
Change the value of connection timeout under General HTTP Settings from 120 to 400 (If that doesn't fix, try 800)
Do this at least on couple of client machines to make sure it works
Hope this helps someone.